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Friday, September 16, 2011

Empty threats by the IMF?

There has been a lot of back and forth over the past week or two regarding the next tranche of funding due to be paid out under the original Greek bailout. The EU and the IMF were originally due to pay out €8bn to Greece (€5.8bn and €2.2bn respectively) by the end of September. However, eurozone finance ministers announced today that this would be delayed until the start of October (with the funds being released around the 15 October). Most reports suggest that Greece has enough money to last until mid-October, so this is cutting it mighty close to say the least.

But what are the chances of the funds not being dispersed?

We saw Christine Lagarde, Head of the IMF, yesterday calling for greater budget cuts in Greece and firmer implementation of the previously agreed bailout conditions. We’ve seen the EU/IMF/ECB review team leave Greece to allow the government more time to implement some necessary austerity measures and we’ve also heard a plethora of comments by leaders and politicians across the eurozone suggesting that if Greece doesn’t pay, the funds will be withheld. This would suggest there is some significant risk of the money not being paid out.

However, behind the scenes this seems unlikely. We saw a similar situation in the early summer with the previous tranche which led to the second bailout being agreed. The diversion this time around is less substantial to some extent, since the IMF cannot complain that long term funding is not assured as it helped sculpt the second bailout agreement (in reality we all know that Greece will default and the second bailout will not be enough but we’re viewing it from the perspective of the EU/IMF). Greece has already agreed to levy a new property and solidarity tax, which, estimates suggest, should cover any budget gaps for the rest of the year. Again in reality this means little from a country which already fails to collect taxes efficiently (particularly property taxes), but seems to be enough to appease European officials, who already look keen to complete the review and disperse the funds.

So the Eurozone part of the funds look likely to be paid out. The IMF is holding out, but in reality this is probably more of a negotiating strategy to gain more concessions, than a full blown stand-off over the solvency of the country (although clearly the IMF is losing patience with Greece - see it’s hesitance over getting involved in the second bailout). Even if the IMF did not release its share, the EU could still pay out its portion or even cover the IMF’s. The Greek Central bank could also pump liquidity into the banking system using the Emergency Liquidity assistance (ELA), which be used to buy up some short term Greek government debt, so there are still some options.

In any case, a few weeks is probably too short a time frame for both the EU and the IMF to plan for an orderly Greek default - and both accept a disorderly default would be incredibly painful.

There are plenty of other factors flying around which could precipitate the Greek default (collapse of the banking sector, wider social problems etc), but at this moment in time it does not look like the EU or IMF not dispersing bailout funds will be one of them (we obviously agree Greece will default, but just that it looks likely that they will receive the next tranche of funds). Whether these funds will be on time or enough to hold Greece over until the next tranche in December remains to be seen…

I think the end-game is now seriously in focus generally (except in the minds of EUocrats). Even if the IMF backs out and the EU covers their amount, as you rightly say default is looming for Greece. Will EU citizens stand for much more of this? A very large negative I am sure. Why was no mechanism for such an eventuality ever created - I refer to M. Delors statement from 2001 on this topic.

I agreewith Mr. Roubini's thinking, in general.It would be preferable that this kind of unproductive meetings and conflicting statements stop, because they harm the search for realistic approaches (solutions are medium long-term), work can be done without this kind of verbal exhibition. Since there is no pilot in the Eurozone plane, and it will take years to come up with an unequivocal direction for the euro area, it is preferable to start with a half measure and allow Greece to have the 8 Bilion euros installment on the first rescue plan of 110 Billion euros (the July 2011 agreed upon (?) second bailout plan being 109 Billion euros...), instead of deferring to October 2011, and continuing with the agony and stress.

It is not realistic that the "troika" (IMF, EU, BCE) continually ask Greece's government to come up ASAP with structural measures like privatization, tax collection improvement et al, which will take years to get implemented. The decision to take is whether Greece is allowed to stay in the Eurozone, and if so to decide rapidly on a severe reduction of Greece's debt: a "haircut" of around 50%, and jointly prepare a medium-long term plan, or whether Greece should exit the Eurozone. This would cut short a lot of unnecessary talk, since to take a decision is better than not taking one (a banality maybe, but a good rule in business).More comments are available in my blog: macrovolatility.com